Inside This Issue - Opinion
Rising commodity costs a formidable challenge
February 21st, 2011
Just as mass market retailers and their suppliers are beginning to see some signs that, despite the discouraging employment picture and uneven economic recovery, many consumers are starting to spend more freely, the specter of rising commodity prices threatens to stop the momentum.
Since November comparable-store sales have risen, if sometimes fitfully. According to consulting firm Kantar Retail, volume by that measure advanced 5.6% in November, 3.2% in December and, even with inclement weather hitting much of the country, 4.9% last month. The trend, coupled with a number of surveys that indicate a growing level of consumer confidence, points to the prospect of better days ahead.
At the same time, however, economists have been charting a substantial increase in the price of the commodities that go into many of the consumer products that mass market retailers sell. The International Monetary Fund reports that during 2010 the cost of many raw materials soared. Cotton prices rose more than 100%, while the cost of corn increased over 50%, to cite two examples that have a direct impact on major retail categories — apparel and food.
Pressure on CPG manufacturers and grocery, discount and drug store operators to raise prices is the inevitable consequence. How they respond will affect their businesses and reverberate throughout the economy. By simply passing the higher costs along to consumers, retailers and suppliers risk putting an abrupt end to positive sales trends; at the same time, absorbing those expenses would have serious negative implications for profit margins. That leaves little room to maneuver.
Working in tandem, mass market retailers and their suppliers should focus on further streamlining operations to take costs out of the system and help minimize price hikes. Always important, disciplines such as purchasing, logistics and distribution, and in-store execution will be more pivotal than ever.
Value remains a focal point for consumers, and retailers and suppliers that manage to deliver it in the face of increasing commodity prices will not only stand out in the current business environment but earn the enduring allegiance of shoppers, something that’s sure to continue to pay dividends when a true economic recovery finally takes hold.